You missed it, didn’t you?
The rally, I mean. The 30% Nasdaq surge from the “Oh my God, is he really gonna invade Iran?!” lows.
Don’t blame me. I told you he wasn’t. Wasn’t going to invade I mean. As with all the not-investment-advice published daily in these “hallowed” pages, you were free to take that for whatever it might be worth.
(For the record — and for the records — It ended up being worth trillions upon trillions in market cap. Nvidia alone added nearly $1.75 trillion in value from March 27 through May 14.)
If you did sit this one out, don’t fret: You weren’t alone. A lot of the smart money struggled badly, where that means under-captured on the upswing.
The updated figure on the left, below, shows what happens when you’re an active mutual fund (i.e., a Dodo bird in 1650) and the nature of your profession condemns you to underweights in the largest names during a rally when those names comprise the lion’s share of gains. As Nomura’s Charlie McElligott’s been especially keen to point out, the “same” funds were unfortunately underweight energy ahead of the war, both as a sector proper and as a theme.
The figure on the right gives you a sense of what happens when you’re a macro hedge fund and your bullish front-end rates bets get blind-sided by history’s largest oil supply shock and the (hawkish) read-across for central banks, at the same time you didn’t have anywhere near enough upside equity exposure when stocks turned on a dime.
Nobody “had it on,” so to speak. So everybody had to chase and grab and pile into upside optionality, particularly in tech, semis and all things AI, culminating in what now looks like an unstable “spot-up, vol-up” trade just waiting on a reason to reverse course and go “wrong-way.”
The figure below continues to captivate. I’ve used it before, but this one’s updated. It illustrates how investors and traders are thinking about portfolios in a world where macro and fiscal realities have undercut bonds’ appeal, which is to say undermined their capacity to hedge risk assets.
A semis-energy barbell’s the “new 60/40,” as McElligott’s fond of putting it. The semis are your risk-on asset, energy’s the risk-off hedge, and both speak to a geopolitical reality defined by competition for scarce chips and molecules.
Of course — and this is important, which is why I keep saying it whenever I mention the “new 60/40” — as unpalatable as bonds might be, and as much sense as semis and energy make, there’s nothing “risk-free” about a portfolio comprised of a 50/50 split between high-beta, richly-valued bubble stocks and oil companies which, by definition, live and die by the vagaries of prices for fossil fuels.
That’s why you need some VIX calls or SPX puts — something — that’ll cover your ass in the event of a dreaded “Corr 1” shock. You know, in case there’s an Ebola pandemic, or something.
(As I pointed out repeatedly during COVID, if humanity gets into a situation where one of the VHFs becomes airborne and goes global, unchecked, it’ll be all over within months. “It” being civilization. Your VIX calls won’t help. I’ll see you on “The Road.”)
Aaaanyway, the figure below’s a testament to the concentrated nature of the rally since the Iran war lows.
The Nasdaq 100’s outperformed the equal-weighted S&P by ~20ppt.
JonesTrading’s Mike O’Rourke thinks that might be a harbinger. “The S&P 500 is trading at 27.1x earnings and the Equal Weight is at a 32% discount at 18.4x earnings,” he wrote, adding that when the valuation discrepancy “becomes this stretched, investors seeking to take profits and reduce risk while staying invested typically rotate from the S&P 500 into the Equal Weight index.”
If you’re wondering what that valuation disparity looks like for the Mag7 versus the equal-weighted US benchmark, it’s much, much wider, as you might expect: The equal-weighted S&P trades at a 50% P/E discount to the vaunted septet.
Commenting further on the outlook for equities, McElligott reminded investors that the post-Op-Ex environment gives spot more room to move around, but said Nvidia’s report on Wednesday “could hold us steady a bit longer.”
Still — i.e., Nvidia results aside — Charlie said that in his view, “we’re getting closer to the day” when the semi gauge, which may just be the biggest bubble since 1700, “goes -5% early then zooms to -12% late day on the rebalancing vortex to sell.”
If that were to happen, it’d likely knock into the broader market, pushing S&P futs “close to the -2% area where the spot / vol correlation begins to turn,” he went on. “After -2.5%, you can see vol begin to get squeezy.”
